Interview with Didier Pouillot, Digiworld Yearbook project manager

Interview published in weekly letter from ARCEP - 7 June 2013

Find the intervew Didier Pouillot by ARCEP on the occasion of the publication of the 13th of the DigiWorld Yearbook: our annual publication on the state of the digital world. (Interview available in french only)

Didier Pouillot reviews the status and trends of DigiWorld markets: telecommunications, computer and television, an economy that accounts for 6% of global GDP, but whose performance is currently short of those of the general economy, particularly in Europe, on which Didier Pouillot explains the situation. This is also an opportunity to recall the issues in each market of the digital economy with many business models are changing mainly because of internet giants: Facebook, Amazon, Google, Microsoft and Apple, and more broadly OTT services.

Discover the slides from the London Yearbook presentation with Ronan Dune, CEO Telefónica :

OTT communication service
will account for 6% of total
communication service revenues by 2020

In 2020, for the USA and EU5 combined, OTT communication service revenues will have increased to 15 billion EUR from 7 billion EUR in 2012. Yet they will still only account for 6% of total communication service revenues, with telcos accounting for the remaining 94%. The total market will decline, mainly due to the telcos’ devaluation of the market, rather than the OTTs taking their revenues.
Drawing on IDATE’s extensive work on the latest trends in communication services, this latest study, “Future of Communication 2020: Telco & OTT communication - market forecasts” delves deeper into our analysis and forecasts the paths which the market is expected to take between now and 2020.

The six key trends shaping the market
In this study, IDATE outlines the 6 key trends happening in the communication services market which will shape the market through to 2020.

1. The aggregation of communication types: IDATE notes that most communication service providers are aggregating and providing several communication types to the market. For example, Facebook is primarily a social network (which is a communication tool in itself), but also offers voice, messaging and file sharing services too. In the case of operators, they of course traditionally offer voice and messaging as their core product, but are now looking to diversify into file sharing too, either through cloud products or the GSMA-led RCSe (Rich Communication Suite enhanced) initiative, marketed as ‘joyn’.
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* EU5: France, Germany, Italy, Spain, United-Kingdom

2. Beyond traditional communication for telcos: The telcos are now looking to offer more than simply voice and messaging, in order to remain competitive in the market and to remain more than a dumb pipe. IDATE sees three main ways in which telcos are striving to achieve this: providing their own OTT communication service (such as Telefonica with their TU Me app and Orange with their Libon app); partnering with OTT communication service providers (such as Verizon and H3G UK with Skype and H3G HK with WhatsApp); and joining the GSMA-led ‘joyn’ initiative, launched by the three principle operators in Spain (Orange, Telefonica and Vodafone), which aims to offer enhanced communication services across all mobile phones in the same simple way as traditional voice and SMS today.

3. Voice and messaging becoming a telco commodity: The need for telcos to offer more than the traditional voice and messaging service is largely due to the commoditisation of such services. These services are today taken for granted, and virtually all telcos offer them in abundance; that is to say for a certain fee, users get massive amounts of minutes and messages that in reality are hard to use all up, and there are also many cases of unlimited offerings. This means that the value of such services is decreasing. Another trend for telcos is bundling, from double to quadruple play. Whilst such marketing strategies are intended to increase user appeal and also reduce churn, the fee itself is normally reduced and hence further devalues the standard voice and messaging services.

4. Mobile data and WiFi makes strong case for OTTs: For OTT communication services to work on mobile, there needs to be Internet connectivity on the mobile. Especially with the exploding popularity of smartphones, this Internet connection is increasingly provided by both mobile data plans and WiFi. Unlike voice and messaging, unlimited mobile data packages are relatively rare with at the very least throttling usually involved. Especially in the case of messaging there are only small amounts of data involved and thus this poses no problem. Video communication, on the other hand, is often banned by operators, but is possible through WiFi; and in many situations where one wants to use video communication, the user is stationary anyway (such as calling loved ones far away).

5. The rise of video communication: IDATE also notes the increased interest in the market for video communication. The concept is hardly new since operators have in the past tried to market the service, but with limited success. In particular, one of the demerits of operator video-calling propositions was the high cost for users, but now OTTs have come in with a free proposition using WiFi, including the likes of Apple and Facebook. Further, the concept of WebRTC, which allows video calling directly from the browser to any other browser could potentially boost video calling; there is no need for users to download software as WebRTC is an API for developers.

6. Genuinely free OTT offers in exchange of user data: One of the obvious advantages of OTT services is that it often comes for free, or in some cases, a very low fee. As an overall trend in the Internet market, the advertising model is becoming standard and the advertising market is set to grow with better tools and analytics, especially for mobile. The communication market is no exception, and is set to profit from advertising. However, generally speaking, users see advertising as a nuisance, and there is also a market for low-cost services with no advertisements, as demonstrated by the highly successful WhatsApp application.

Project Manager: Soichi Nakajima

Soichi joined IDATE as a senior consultant in January 2009. His main area of endeavour is the mobile communications market, such as the mobile Internet, applications, contents and services, the analysis of strategies employed by the various players, scenario building and forecasts. He also works on other business potentials for the mobile Internet, such as smart grids and VoIP. Before coming to IDATE, Soichi worked for NTT DoCoMo, Japan’s largest mobile network operator by subscriber numbers, where he played a leading role in the strategic planning of the roll-out of Japan’s first 3G M2M data-only tariffs. Soichi holds a Bachelors degree in mathematics, from the University of Nottingham in the UK.

To learn about more about this topic and our related market report please visit our website

Patent thicket

My holidays in the second week of August coincided with the start of a patent trial before the US District Court of San Francisco between the smartphone market's number one player, Samsung - which had a just under 33% market share in Q2 - and the number two player: Apple, with a market share of just over 16%.

We will not comment here on the ruling, or even give our views on the lawyers' arguments.

Of course we can say that this trial is just one in a long series of court battles that have been waged in United States, Australia, Germany… which are listed in the annual chronicle in our latest DigiWorld Yearbook. We can also add that what is at stake in these patent wars is a market worth hundreds of billions of euros and, as an adjunct, a certain degree of control over the internet of tomorrow as the smartphone - and now tablets and smart devices in general - have become such a vital component in the supply of content, migration to the cloud, control of internet users, etc. Here, Samsung is far from a second-tier player: it is number one in terms of handset sales, in addition to being one of Apple’s key suppliers for iPhone components! But, aside from this South Korean giant which is the main purveyor of Android, it is Google and all of Android’s backers that are being targeted.

My summer holidays gave me an opportunity to reread a brilliant article written by Carl Shapiro back in 2001 titled, "Navigating the Patent Thicket: Cross Licenses, Patent Pools, and Standard Setting". Already back then, the famous professor of economics from UC Berkeley had become interested in the patent tangle, and how the patent wars were clogging up the courts.

The purpose of patents is to protect innovation and stimulate investment in R&D. But an unbridled proliferation of patents can ultimately hamper innovation. Innovation is built on an accumulation of knowledge, a little like a pyramid, going higher and higher: each brick that is added raises the pyramid but also relies on a growing number of bricks for support. Are we building a system where each party who adds a new brick needs to negotiate with every other party who added a brick to the pyramid? This is a little like what is happening with smartphones which are extraordinary concentrations of technologies and so supported by thousands of patents.

We are also seeing holdup strategies from companies that are hoarding patents, often acquired through the takeover of other companies, with no intention of using them but rather holding them for ransom from other companies which, inadvertently, included features that are protected more or less explicitly by these patents in their products.

Several solutions have been suggested to prevent these entanglements that undermine a healthy state of competition and consumer interests:

the first is a more restrictive approach to innovations likely to be patented (non-obvious rule). So an application to patent the idea of downloading music or video from the Web, for instance, would be rejected;

the second is to reduce the life of patents, which is currently 20 years, to take the accelerated rate of innovation into account;

the third is to enable cross-licensing and the creation of patent pools. In the telecommunications sector, the advent of a standard goes hand in hand with a procedure whereby each player declares any related intellectual rights and agrees to licence the patents that are essential to complying with that standard, under fair, reasonable and non-discriminatory terms.

But these desirable cooperative processes naturally continue to be closely watched by anti-trust bodies who may see them as more or less conscious forms of collusion, which would be detrimental to competition and consumer welfare. What we are faced with is the complexity of the ties that unite patents and competition policies, and regulation that needs to navigate between creating incentives to innovate and the barriers that they might erect.

Even though it's back to school time, if you can find the time, I highly recommend professor Shapiro's article. It can be found at the following URL.

The new iPad unveiled by Apple yesterday was much as expected. Rumors during the run-up proved fairly accurate when it came to the main features of this third version of Apple’s tablet (especially retina display and 4G) and we believe that this update is a fairly solid response to what competitors have been able to produce so far. No groundbreaking features but rather improvements aimed at strengthening Apple’s position in the market.

Below are some thoughts on what we learned yesterday. These analyses build on our ongoing research on the mobile device market – as found in last year’s report on LTE devices (which is part of our LTE Watch service). If you are interested in this topic, an in-depth analysis of mobile device manufacturers’ strategy and future mobile device innovations, can be found in our upcoming report on Next Generation Mobile Devices which is due out in Q2 2012.

Support for LTE is not necessarily the main advantage of the iPad as is a feature aimed chiefly at users in the US. The new iPad, powered by Qualcomm multimode LTE baseband, supports both 700 MHz and 2100 MHz LTE bands which in itself limits its interest worldwide. Those two bands are and won’t be the much used by operators when deploying their LTE networks. From a European perspective for instance, the device will need to support the 800MHz, 1800MHz and 2.6GHz bands to be usable. But this is not a major issue, given the limited deployments so far in those frequency bands. What this LTE support tells us is how important Long-term evolution has become in the US as a differentiating argument in the mobile device market. It’s also impressive to see how much the US wireless market has evolved over last 4 years. Remember when the first iPhone was launched back in 2007, with no support for 3G because of those new-gen networks were still embryonic in America? Now, the US is at the forefront in deploying the latest radio access network technology, and Apple could not ignore it when targeting its domestic market. It is still unclear how far US operators have been pushing Apple to go that way, but one thing is sure: the announcement that the latest iPad supports LTE was clearly US-driven.

Given the low rate of deployment for LTE networks outside the US (and Japan and South Korea which are the two other big LTE markets), and the increasing number of bands to be supported, supporting DC HSPA+ and HSPA+ was Apple’s only option to limit the number of different versions of the iPad and have 4G-branded iPads sold internationally. There has been a lot of debate over whether or not it was fair to use the term 4G for DC HSPA+ and HSPA+ technologies. They are indeed evolutions of 3G standards; their performance is an improvement over what we are used to and, for everyday uses, can be considered to deliver “LTE like” performance. We should also remember that even LTE is not considered by the 3GPP as a 4G technology: only LTE-Advanced and WiMAX IEE 802.16m are considered as such. In any even, from a market and network deployment perspective, supporting DC HSPA+ and HSPA+ was the best solution for the non-US market. Operators all over the world announce are upgrading their networks to this standard to able to support downlink rates of up to 42 Mbps (in dual carrier mode). The new iPad will support this maximum theoretical bitrate, while DC HSPA+ will eventually be able to sustain 84 Mbps. Plus these deployments will be in existing 3G bands, so Apple will not need to provide support for other bands.

Apple is by no means the first device manufacturer to announce support for LTE. Samsung, HTC, LG and especially Motorola were first to launch such devices in the American, South Korean and Japanese markets. As we expected and noted in our report on LTE Devices and in our LTE Watch service insight last year, Apple has taken a more cautious approach in its release timetable, waiting for baseband solutions to be mature enough to lessen the number of wireless versions of the iPad, and enable Apple to provide a solid enough 4G experience in terms of battery life. Here, Qualcomm was the most relevant solution for Apple – providing the broadest support for RAN. As mentioned earlier, providing support for DC HSPA+ alongside LTE and CDMA2000 EV/DO was a strategic move on Apple’s part – both in terms of industrial process (reducing manufacturing and BOM costs) and marketing (being able to call it 4G worldwide).

In terms of battery life, Apple could not afford any noticeable reduction in performance when using 4G. Of course new LTE basebands from Qualcomm (probably the MDM 9600) somehow reduced their footprint, but also forced Apple to perform some major reengineering to handle increased drain on the battery. This basically boils down to making more room for bigger batteries, without altering the form too much. The relative increase in the new device’s thickness (9.4mm as compared to 8.8mm for the iPad 2) is an indication of how challenging it was for Apple to provide support for LTE and deliver increased graphical performance required for the retina display. When we look at the specs, the new iPad battery is a 42.5 watt-hour unit, as compared to a 25 watt hour battery previously… so nearly twice the capacity as before. Impressive. It still remains to be seen how the new iPad compares to other LTE tablets. There appears to be a growing consensus around the web that the new iPhone will naturally support LTE as well. I’m not so sure, as the design constraints this involved for a smartphone are a whole other ball game. It will be much harder to make extra space for increased capacity battery. In any case, the technical challenges are big enough for me to think that, should it support LTE, the new iPhone will be rolled out in October rather than in June.

Speaking of form factors and screen size, the latest iPad offers nothing new on this front – which confirm our previous analysis on the subject. Indeed, a different size of screen was very unlikely because of the hardware fragmentation it would have prompted, which is a major issue for third-party developers. Apple yesterday announced that 200,000 iPad specific applications were available on the App Store. This is of course part of the success of this device, and one big difference with Android tablets today in terms of ecosystem maturity. For an app developer, having to think of different screen sizes only burdens the development process in terms of both time and money. In terms of user experience, ensuring that all applications will behave the same way across all devices of the same category is strategic, and Apple clearly had this in mind when making the choice of not bringing further fragmentation in terms of screen size.

The Retina display is probably the most obvious improvement. The previous iPad had just a standard resolution for a 9.7-inch display, but the pixel density of the new iPad really makes a difference … both with the previous model and with what the competition is offering. It is not sure how many of Apple’s display partners (LG? Samsung? Hitachi? Sharp? Panasonic?) are involved here, and if competitors will have access to this technology (it took some time for Apple’s competitors to release a smartphone with higher ppi than the iPhone 4S). What is certain is that Apple may well prevent its rivals from getting their hands on the technology by occupying the production channel. Given Apple’s unmatched capacity to order such components in very high volumes, its competitors will likely find it difficult to find enough components for their own devices.

In all of this, there has been no mention of Amazon and its Kindle Fire… even though it is reported to be Apple’s most successful competitor in the tablet market. Apple still isn’t targeting this segment of the market overtly, even with a lower-priced iPad in its line-up. This may be a sign that, for Apple, Amazon is more a competitor for Android tablets than for the iPad which is aimed at the mid-range to high-end market.